How to start investing: A beginner's guide

Investing can help you reach your financial goals, but it can be hard to know where to begin. Learn how to invest your money in our beginner investing guide.

If you’re new to investing, you may think you need a lot of money to invest. Or that the stock market is too volatile and that you’ll lose your money. Or even that you can only invest with the help of a financial professional.

These and other misconceptions can cause you to miss out on the potential benefits of investing. So, let’s look at a few basic concepts of investing that can give you the confidence you need to begin.

What is investing?

Investing is a long-term strategy that can help you grow your money and pursue longer-term goals like a down payment on a new house and funding your retirement.

While saving and investing both involve putting money away for the future, they’re different in fundamental ways. A savings account gives you easier access to your money, but it’s a lower risk/lower reward option. With investing, you accept more risk in exchange for potentially greater returns over time.

Why is investing important?

Investing is an essential part of any financial plan. It can help you achieve both short- and long-term goals. Here are two notable benefits:

Investing helps fight inflation.

Inflation erodes the value of your money over time. For example, if the annual inflation rate is 3%, you’ll need to earn at least this much on your money just to break even – and most basic savings accounts can’t match that. Investing, however, has the potential to beat inflation. While past performance is not a guarantee of future returns, the S&P 500’s inflation-adjusted annual average return on investment is about 7%.¹ So, if your investments earn an average annual return of 7%, your real return will be 4%.

Investing benefits from the magic of compound growth.

Compound growth happens when the return on your investment dollars generates its own return, and you don’t have to lift a finger. For example, if you earn 7% in the first year on a $1,000 investment, your total return is $70. The next year, you can invest $1,070, which, if it returns 7% again, will yield a total return of $74.90 — an extra $4.90. Multiply this by thousands of dollars and many years and you can see the potential impact of compound growth. The earlier you start investing, the more time you’ll have to take advantage of the power of compound growth to build wealth.

What to consider before investing your money

Investing brings risks as well as potential rewards, so the first thing to do is check in on your financial situation. If you answer “no” to any of these questions, take steps to be able to answer “yes” before you start investing.

• Do you have an emergency fund in place? Your emergency fund should be enough to cover three to six months of your living expenses.
• Have you paid down any high-interest debt? High-interest debt can include credit card debt and personal loans.
• Do you have extra money after you pay your expenses each month? There’s risk to investing your money, and it’s a long-term strategy, so be sure you could live without the money you plan to invest.

How to determine your investment strategy

Before you start investing, you should create an investment strategy. This outlines how you will diversify your money among various investment vehicles.

Your investment strategy should be guided by four things:

• Your financial goals. Whether it’s purchasing a new home or sending your kids to college, knowing what you want to achieve can help you make the most of the money you’re investing.
• Your age/timeline. The longer your timeline, the more investment options you have (and the more aggressive you can be).
• Your risk tolerance. Every investment comes with risk. Generally, the greater the risk, the bigger the potential reward. Understanding your preferred balance of risk/reward is the foundation for your investment portfolio.
• How you want to invest. Would you like to work with a financial professional, invest on your own, or a combination of the two?

Keep in mind that your investment strategy should evolve throughout your life. Consider taking on more risk when you’re younger, since your money has more time to recover from potential losses. As you get older, however, you may want to lower your risk in preparation for retirement.

Where to start investing

Now let’s review your investment options. Each has its own growth, risk and diversification considerations.

Different types of investment vehicles

Your investing strategy will help you determine which types of investment vehicles are right for you. A diversified investment portfolio that includes a mix of and across asset classes may reduce the risk associated with any one type of investment. Keep in mind that diversification and asset allocation don’t guarantee returns on your investments or protect against losses.

Common investment vehicles include:

• Stocks: A share of ownership in a company. These are also called equities.
• Bonds: A loan that you make to an entity, such as a government or corporation. Types of bonds include corporate, high-yield, municipal and mortgage.
• Mutual fund: A pool of money from many investors that is used to invest in securities. Types of mutual funds include equity funds, fixed-income (bond funds) and money market funds.
• Exchange-traded fund (ETF): A type of security that tracks a stock market index, a specific sector or a commodity, such as natural gas or wheat.
• Real assets: An investment in something tangible, such as real estate, commodities or infrastructure.

Different types of investment accounts

Depending on your investment goals, you can choose from a range of investment accounts. Diversifying your investment accounts may help reduce the amount of taxes you’ll have to pay over time.

• Retirement accounts include employer-sponsored retirement plans, such as a 401(k), and individual retirement accounts (IRAs), including traditional and Roth IRAs.
  What’s the difference between a 401(k) and an IRA?
• Non-retirement investment accounts include education accounts, Health Savings Accounts (HSAs) and brokerage accounts.
  Guide to non-retirement investment accounts

Choose how to invest your money

How you invest will look different based on your investing aptitude and your comfort level with technology. Of the options listed below, each has different requirements as far as how much money you need to invest to get started:

• You can start investing your spare change (literally) through the convenience of mobile apps such as Acorns and Stash. These investment accounts are designed for investing beginners and offer access to investment education along the way. A note of caution that the monthly fees can add up, especially if you’re investing a small amount.
• If you have more money to invest and are ready for a higher level of service, consider using a robo-advisor. You provide your goals, timeline and risk tolerance, and the robo-advisor selects and monitors your investments for you. Minimum deposit amounts vary, and you often have access to a financial professional if you need it.
• You can also work directly with a financial professional. A financial professional can help you choose the right investments based on your financial goals, investing timeline and level of risk tolerance. Financial professionals are compensated for their services, so keep in mind their fee will reduce your overall investment return.

Learn how to maintain your investments to build long-term wealth

In most cases, investing isn’t a set-it-and-forget-it activity. Your portfolio may take some work to maintain, such as if it requires further diversification or if the market changes significantly. Or you may experience a major change in your lifestyle that justifies an adjustment to your portfolio.

Dealing with market volatility

You’ve probably seen these words before: Investments can go down as well as up. Market volatility is a fact of life, so keep in mind that you’re in it for the long haul. A financial professional can be a good sounding board in rocky situations. They can give you a clear perspective and help you understand your options.

Understanding how inflation affects your investment

Most people understand that inflation increases the price of their groceries or decreases the value of the dollar in their wallet. But inflation affects all areas of the economy – and over time, it can eat into your investment returns.

Understanding how interest rates affect investments

Changes in interest rates can affect various components of your investment portfolio. For example, interest rates and bonds have an inverse relationship: When rates rise, bond prices fall, and vice versa. While interest rates don’t directly affect stock prices, rising or falling rates can have a trickle-down effect on stocks.

Adapting your investment strategy to life events

Even if you prefer to be a hands-off investor, there are times when you’ll need to play an active role in realigning your assets to build wealth. This is known as portfolio rebalancing. It can be triggered by life events such as:

• Starting a family
• Buying a house
• Receiving an inheritance
• Nearing retirement

Quiz: The best investing options for you

Feel ready to begin investing?

This quiz from U.S. Bancorp Investments will give you actionable insights into what type of investing suits your financial goals and preferences.